Bids for offshore drilling rights plummet

By ALAN SAYREAP Business Writer

Wednesday

Mar 18, 2009 at 8:29 PMMar 18, 2009 at 8:34 PM

NEW ORLEANS (AP) — Winning bids for offshore drilling rights in the central Gulf of Mexico fell by more than 80 percent compared with last year, another example of how vastly the energy landscape has been altered during the global economic downturn.

Energy companies bid $703 million on Wednesday for the right to explore for fossil fuels in the Gulf, compared with last year's $3.67 billion in winning bids, a record set with oil prices well above $100 per barrel.

Interior Secretary Ken Salazar insisted that the reduced bidding still represents great interest in developing oil and natural gas off the coasts of Louisiana, Mississippi and Alabama.

The administration last month said it wanted to impose new fees for oil and natural gas found in federal waters.

"Oil and gas will be part of the equation as we move forward toward energy independence," Salazar said before the bids were opened by the federal Minerals Management Service.

Oil companies typically make financial decisions on major exploration projects that are based on projections 10 to 15 years in advance.

But Andrew Lebow, a senior vice president and broker with MF Global in New York, said the oil price crash has been so severe that long-term projections have been altered, thus affecting not only the plans of cash-strapped independents, but some major energy companies as well.

"If you went out from a year ago, the expectation was that the prices would continue going up," Lebow said. "There seemed to be no ceiling possible. The expectations now are for higher prices, but not the $200 they were talking about last year."

"The American citizen who owns these lands should get a fair return on these lands," he told reporters Wednesday. "The oil and gas industry should not see us as their enemy."

The vast majority of the lease offerings received single bids.

A subsidiary of Royal Dutch Shell PLC won competition for a deepwater tract with a single bid of $65.6 million. Deepwater prospects typically take up to seven years to develop — if produceable oil and natural gas is found — along with hundreds of millions of dollars.

Because of the long deepwater development period, some energy companies may have a backlog of leases and do not want to take on more, said Tom Fry, an industry analyst and president of the Washington, D.C.-based National Ocean Industries Association.

Drilling activity is on a sharp, downward spiral.

Houston-based Baker Hughes Inc. reported last week that the number of active oil and natural gas rigs dropped to 1,126. That is the lowest point since February 2004.